Executive Summary
In July 2021, Schwab released its latest RIA benchmark study, which, among a plethora of other things, asked advisory firms what their top strategic initiatives were. Unsurprisingly, the top result was to “acquire new clients through client referrals”, but coming in at second (and moving up from the fifth spot the previous year) was to “recruit staff”. Given the steady growth in the number of clients that advisory firms serve (regardless of firm size) over the past several years, it’s also not surprising that firms are focused on hiring additional staff to absorb the growth. But in an industry that, for much of its history, has seen a tremendous amount of turnover, many financial advisors are concerned that the advisors they hire may not stick around nearly as long as their clients, the vast majority of which stay with the firm they hire for life. Which raises the question: How can financial advisory firms structure their hiring practices to manage the risk of advisor turnover?
In our 68th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss two reasons why advisory firms may be wary of hiring additional advisors, how advisory firms can transfer the trust that’s been built over time with their clients to other advisors, and the key mindset shift that advisors should make when thinking about hiring advisors into their firm.
As a starting point, it’s important to recognize that advisors often tend to overemphasize the need to ensure that clients have a continuous relationship with just one advisor. The reality is that clients, more often than not, care more about whether they are getting the best advice and service they can get rather than who is giving it to them. Which is good news for advisory firms and is the reason that they can not only scale and grow, but can also get lofty valuation multiples. Because if the “who” part of the equation isn’t as important as most advisors make it out to be, then it means that the trust between advisors and their clients is transferable. The key, however, is communicating that transfer the right way. Advisors who cling to client relationships by saying that they’ll “be there for anything serious that comes up” end up undermining the new advisor. On the other hand, by building up the newly hired advisor and framing the move as increasing the level of service that the client will receive, the hiring advisor takes the trust they’ve built with the client and hands it to the new advisor.
With that knowledge, advisors can then address the underlying reasons why they may be reluctant to hire additional advisors. The first is the fear that, after transferring trust to a new advisor, that advisor still decides to move on. The good news, however, is that the trust that was transferred can be transferred again, which in turn speaks to the fact that clients are clients of the firm, and not any one particular advisor… just as long as the firm is ensuring that their clients are being served well.
The other fear that hiring advisors often have is that their new hires will do so well that they decide to leave… and take clients with them. While that’s always a possibility, advisory firms can mitigate that risk by using a team structure at their practice and ensuring that clients interact with other advisors and employees at the firm, because the more touchpoints a client has, the more likely they’ll stay with the firm even if one member of the team happens to leave.
Ultimately, the key point is that financial advisors who are considering hiring additional advisors to help scale their firm (but may be uncomfortable with the notion that the advisors they hire may not be employees for life) can shift their mindset to viewing clients not as clients of the advisor who services them, but rather as clients of the firm itself. And it’s the transferability of the trust that’s been built with clients over time that makes it possible for firms to grow, for employees to turn over, and for clients to stay with an advisory firm for life.
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***Editor's Note: Can't get enough of Kitces & Carl? Neither can we, which is why we've released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and Stitcher.
Show Notes
Kitces & Carl Podcast Transcript
Michael: Good afternoon, Carl.
Carl: Hello, Michael. I just want to make it very clear for the people in the audience that are trying to make these comparisons. I'm getting these emails about why I'm wearing blue now. I'm like, "Dude, come look at my closet. My closet's been blue for 27 years before my Michael was...I even knew him." It's a different blue.
Michael: But, you know the blue that everybody is really wondering about right now, Carl.
Carl: Don't start.
Michael: You are videoing, for those of you who are listening, you can't see it, but Carl is coming to us today on video from a very neutral background, white wall, and there is no blue sofa behind him.
Carl: Well, good news. It won't be long because we're in the middle of a project in the house. The blue couch has arrived from London and I was just told two days ago, it needs to go to the office so it is not damaged during this project. The blue couch will be here. I just have to figure out...I might have to tilt it up sideways.
Michael: Wait, so you're not bringing the blue couch for us. It just has to be at the office so it doesn't get hurt at the house? That's very convenient, Carl.
Carl: I don't know how much people really actually care about this but... Michael: If that's the story you need to tell yourself, that's fine.
Carl: But, I will tell you that my wife said, "Take this to the office," and she said, "But, I know how important it is for that thing you do." She's like, "Maybe you should record in the garage where it is." I'm like, "Stop, stop, stop. Michael's going to be fine." I'll bring the blue couch.
Michael: All right. But, now that you put out there, I've got to say, I am expecting the next episode will either be from the office with the blue couch, or from the garage with the blue couch. Either the couch is coming to you or I feel like you got to go to the couch at this point.
Carl: I think your point is I am no longer necessary, as long as the blue couch is involved.
Michael: It's a joint effort. The couch doesn't give good audio, it's just really a visual thing. We do still need you in this.
Carl: I'll have it. It's coming to the office. I'm looking around at where I'm going to put it. Yeah, it'll be good. Anyway, what are we actually talking about?
Challenges That Advisory Firms Face When Hiring Additional Advisors [03:05]
Michael: What are we talking about today? We had this great question come in. As firms grow, there's so much hiring under way right now. Just seeing it industrywide. Schwab had its recent benchmarking study. Number one challenge for firms is more growth because that's pretty much always number one, and number two was hiring more people to handle all the growth for the firms that are growing, getting clients. We even see this in new planner recruiting. We're having just the biggest hiring demand year we've seen in 10 plus years of hiring for advisory firms.
This question came in that I've heard from a number of firms lately, that the reality when you start hiring for your firm, is we don't necessarily know who we're going to get that's going to stick with us for the long term. There's a challenge when new hires come in. You got to introduce them to clients.
There's a risk that the team turns over, and then you have to explain that for clients. And in this business, when we get clients, we tend to basically get clients for life. Most advisory firms, the number one cause of client turnover is often death. My client died or at least the primary client died and the spouse goes somewhere else. We're attached to clients for decades and the average employee at a firm, of really any size in business, does not stay for decades.
I hear this conversation coming up more and more for some firms, it's like an outward anxiety or fear that I don't know how to hire, I don't know how to structure it or I'm even afraid to hire because I don't know how to hire the person that's going to be here for the next 30 years with my clients and I don't want to hire someone who doesn't stay here for the long run the way that my clients do. What do I do? How do I structure this to manage the risk of employee turnover, or advisor employee turnover?
Carl: Yeah. Wow, that's a big question. I think as normal, probably I'll come at it from maybe a slightly different angle, which is I don't know exactly how to do all that stuff with the HR thing and the book and the manual and the stuff that you have to have and binders, but I do know that I wonder if it really is as big a deal as we think it is. I wonder if, look, giant, empathetic hug, this may sound like a punch in the nose. I don't mean it that way. I mean it as an empathetic hug. We have so many fancy feelings, and one of those feelings is, "Oh, these clients will only ever work with me or the advisor," and that's one of the feelings. And the other feeling is you just don't know. What's that old adage? Hire slow, fire fast. But, I think even better, it's like, hire fast, fire fast. We don't know. The only way to know...
Michael: This is why you're a high quick start and I'm a low quick start. But, sure, go with it.
Carl: And that's why I have no employees and you have a bunch, right? We know how well that worked for me. But yeah, maybe more importantly is this idea that, really? Let's get over our little fancy feelings that we're the only ones. I told this story. I got told, when we were getting ready to...it was fairly obvious that I needed to sell my practice, and I was convinced that nobody could ever serve these clients ever, ever, ever. These clients, no way. And somebody sat me down and said, "Carl, one of the saddest, most disappointing days of your career is going to be when you sell your business and nobody cries but you."
Michael: No, no, no. They're all going to be so distraught. Every client, Carl, is going to cry when you tell them that you're leaving because they want you to remain in their life forever.
Carl: Exactly. That's why this is an emphatic hug and not a punch in the face, is because I felt that way. And I can now say from the other side, it's a punch in the face. You get over your fancy feelings. I just had lunch actually with...I sold my business to one of the big, large firms that a lot of us know, and those advisors there are amazing and they're still serving my old clients, who are also, many of them, my friends. I just had lunch with one of my friends, and I had forgotten about this. And they are like, "Oh yeah, the advisor from the place was out there, and it was great." I'm like, "How's that going?" "It's great. It's going really great." It turns out that it's not as big a deal as we make it. That would be my take.
Michael: I do agree that I think there's this process that happens for us, where clients do tend to stay for the long run, mathematically, average advisory firm has a retention rate of 95+%, strong firms often are 97%, 98%, just you do the math of that attrition. Clients, on average, turn over in 20 to 30 years or more. Most clients basically stay with us until someone passes away. This mentality that my clients send me clients for life or these clients the firm for life, I think often brings with us this mentality, "Well, we have these deep relationships and clients are clients for life. So, if clients are clients for life, then advisors that we hire have to be advisors for life, so how do I find the advisor that's going to be the advisor for life with me?"
And I think you're right at the end of the day, that that is a belief we're introducing into the conversation that just doesn't match reality. The reason why it doesn't match reality is, look, as you went through in selling your practice, as a lot of firms go through, even if they're not selling, when they hire that first other advisor, when it goes from just them to not them, and they introduce the other advisor, and they say, "This is...
Carl: Wait, wait, wait. We got to pause right there. That moment, you're exactly right, so much stress, so many feelings. How am I going to handle...I want to grow. I want to change my niche. I want to specialize. I want to focus. What do I do with these people? Oh, introduce them to somebody else. Oh, no. Keep going. But yeah, that moment...
How Client Trust Can Be Transferred To Another Advisor [09:46]
Michael: That moment, I find when that moment comes, the new advisor comes in, one of two things happens and it's entirely on from us, as the senior advisor, about how you handle this conversation with a client. One version starts down the road, "I've worked with Jenny here but we're expanding the firm. Jenny's going to be working with you now. Don't worry. I'll still be here as well if anything really serious comes up, but Jenny's going to help handle you going forward." And we basically say, "Yeah, Jenny's here to sub in, but basically, it's still all about me, I'm at the center of the relationship." Then, Jenny usually doesn't end up having a lot of success because we basically told the client that Jenny is still subservient to you, to me, to the lead advisor. We cling to the relationship, even as we're supposed to let it go, and it doesn't go very well.
The alternative to this is when you hire that advisor in, you say, "We're expanding the team. This is Jenny. She's amazing. In fact, she actually does more work with retirees than I do. She's going to take better care of you than I ever could, but she's part of our firm, so we collectively are so thrilled to continue to service you with an expanding team and even more capabilities going forward. So, I couldn't be more excited that Jenny's going to be working with you now. She'll take better care than I ever could." And we take all of that trust that we built with the client over the years, and we hand it to that advisor. And it's a terrifying conversation, just truly, every advisor I know that has gone through this, somewhere between 97% and 99% of your clients go exactly where you say as long as you tell them that this is actually a good thing and it's better for them. That trust is transferable.
It's why at the end of the day, we can sell our advisory firms for the frankly, rather amazing multiples that advisory firms are getting these days. Yes, we have this amazing trust with clients, but if you take the steps and the effort and the time and the focus to transfer it, virtually everybody transfers with it. I won't say everyone. There's always the select one or two clients that are like, "No, it's going to be you or I'm firing you" and you can decide what to do with them. But, almost everyone goes. The trust is transferable.
And I point that out for two reasons. First and foremost, it's why at the end of the day, advisory firms can grow and scale. It's not always one advisor at the top forever with every single client, and the firms grow and it goes just fine. The trust is transferable, at least when you take the proactive steps to make it a positive trust transfer.
The second thing that I think is so important about that is what it also means is, frankly, if you can transfer the trust once, you can transfer it more than once. If that advisor doesn't stay with the firm and ends up moving on for whatever goes on in their lives and you hire another advisor in 2 years or 3 years or 5 years or 10 years, and you tell the client, "Hey, so-and-so has gone onto another place," another positive place, we're not killing them off or anything, but "has gone on to different pastures. This is a new advisor who's joined our firm, another fantastic advisor. We are so excited to make this hire, so excited to have them working with you." You build them up again. You transfer that trust again and the clients stay. And this is why at the end of the day, advisory firms do grow, do add advisors, do have turnover and no one's hemorrhaging clients. And again, it's why our businesses are valuable and get the multiples, the premiums that we get. We don't give ourselves enough credit for the balance in that trust bank that we build with clients, with ourselves and with the firm, and how transferable that trust is.
Now, you can't abuse that trust or denigrate trust or you will lose that trust, and then there's nothing to transfer. But, when you stay focused on serving a client well, the truth is at some point, they're not a client of you or Jenny or whoever the advisor is, if you're building a multi-advisor firm, they become a client of the firm. And when they trust that the firm is there to serve them and will staff however it needs to staff in order to serve them, as long as you make that promise and you actually give them someone who serves them well, clients stay. The trust is transferable. And when you acknowledge that and own that and don't set this unreasonably unnecessary high stakes, I must hire the advisor who will be an advisor for life or they can't work here and I have to figure this out in the hiring process, which you will never figure out because nobody knows what their life is going to look like in 10, 20, 30 years. If you take that burden off yourself and just say, "Who can do a great job serving the clients in the firm and the needs that they have now," or in the next few years if the advisor is a little newer and growing, take a little bit of the pressure off, recognize that the trust is transferable and don't put so much burden on yourself to say, "I have to find the advisor for life or none at all."
The (Manageable) Risk Of Hiring Additional Advisors [15:07]
Carl: The people who are asking you this question, the concern that you're hearing, why do you think they're concerned? Do you think it's just because it's a misunderstanding of that transfer of trust?
Michael: I think there are two versions of this that come up, or at least I hear two versions. The first is, I'm afraid to hire because I don't know if I'm going to hire someone that sticks with my firm, and I've told my clients that we're their advisor for life, and I don't want to hire someone who then doesn't turn out to be their advisor for life because I'll feel like I broke them a promise. And they'll get mad and fire me, and then all my clients will fire me and then my world will burn down, I'll get eaten by a tiger, just that whole crash spiral that we head down very quickly when we start doomsdaying ourselves. One version is that, which I think as we said, I think in our heads, more than we realize, that the trust is transferable and the clients aren't going to cry when you tell them that this other advisor that you think is totally great and you build them up for that trust transfer, is going to be serving them now.
The second version of this that comes is a little bit different, which is the, what if I find the right advisor and it works, and they build all these great relationships with the clients, and then they leave and potentially take the clients. There's the fear of what if I hire and it fails, and there's the fear of what if I hire and it succeeds, which I think are different problems. The what if it fails is you can transfer this trust, that's why you can do the hire, and you can re-transfer this trust. There is a difference between a client for life with a particular advisor and a client for life with your firm, and the value that your firm provides. As we said, I wish it was the same advisor and we stick forever, but the truth is, as long as the clients are feeling well served by whoever's serving them, doesn't really actually need to be a literal advisor client, one advisor, one client, one lifetime thing. We put that on our shoulders. It's not actually something that clients demand, because frankly, it's not realistic and they know it.
Carl: What do you do about the second one?
Michael: The second one to me, I think, is different. That's a little bit more of a technical practice management issue. The short answer industrywide is clients don't get served by an advisor, clients get served by a team. The more people that clients have touchpoints to in the firm, the more likely it is that if one of those touchpoints leaves, if it happens to be the primary advisor, that the client is still going to stay. If that client is served by a senior advisor, a support advisor, a client service administrator and maybe even a separate planning expert that is a central resource and comes in for the difficult planning topics, the client has four different touchpoints at the firm.
Then, if the one leaves, whoever was that associate advisor, great news, you're getting called up from minors to majors. You're going to be in the lead chair now, and just the very practical reality of what happens in those team-based environments. Lead advisor leaves, firm makes an offer to junior advisor to step up to senior advisor. Here's the gig. You got to retain the clients that you've been working with because so-and-so has left and we want to make sure the clients stay with the firm, and can get a little bit messy and we try to do this as cleanly and nicely as possible.
But, that's how you help to retain the clients, is, “Look, one of the advisors you've been working with has left, but the other advisor is still here. In fact, they're going to be working with you as the lead now. That service administrator you've worked with for the past seven years is still here. The planning expertise we've got is still here.” And most clients stay with that, if only because human beings tend to have a lot of inertia and don't necessarily want to move.
It's not even unique to independent advisory firms. This is the same reason that the major wirehouses have all gone to a team-based environments, because they figure out the same thing. What happens is if you build teams, the only way that clients leave in mass is the whole team has to leave, which is still a risk, but it's a lot harder to get the whole team to leave. It's a lot harder if you're an advisor, if you're an employee advisor in a firm, to get everybody who's involved with your team to leave together all at once and take the collective risk all together. You only need one person who decides they want to stay and the team splits. From the advisory end, bummer, from the firm's end, that's part of the retention strategy.
Not to be Machiavellian about it or anything at all, but just that is one of the indirect benefits for firms working in team-based environments is if you can retain most of the team, you can retain most of the clients. And that's part of how you handle the business risk of having advisors leave. If you have an advisor who lives in a silo does everything themselves for all their own clients, yeah, they're very detachable. It's the same reason why advisors change broker/dealers and broker/dealers can't do anything to stop them, because the advisor is so independent. The broker dealer has no connection to the end clients. That's why brokers change firms all the time.
Communicating Team Structure Changes To Clients [20:29]
Carl: Yeah, it seems to me too that that just gets to the one of the things we could circle back to here as we wrap up, is this idea that you don't know.
And is it a Mark Twain quote? I've worried about a thousand things in my life and most of them have never happened. We don't know and so, yeah, we do the best we can, and then we make a guess in terms of the path forward, like who am I going to hire. And then, we've got all the research that you do around teams and how to structure that stuff, and like I talked about, the binders that sit in the HR drawers, ll that stuff that I don't know anything about. Yeah, there's stuff about that, but then in the end, we have to do the best we can with the information we have today and not be thinking, "I can't do this because five years from now, something bad's going to happen." And at the same time, realizing if we build the right culture, nobody's going to cry when we switch advisors.
I was just thinking about the communication problem around that idea, that lead advisor does leave and have great relationships. Because I always get fascinated by these moments that there's stress about how to communicate, that we all get so tied up in knots about it. To me, I was like, listening to you describe, "Oh, yeah, your lead advisor's still here." I was like, you know what's interesting is from the human perspective, and having been through this a couple of times at wirehouses, I think the idea of the incumbent just being assumptive. There's no defensiveness. There's no, "Hey, Sally left. Susan's going to take over."
Michael: It's just business as usual.
Carl: Exactly.
Michael: It's not even we're making a bid to retain your business. We already have your business, if you're like most firms. We already have your assets. We already have a management agreement. We already have an advisory agreement. We already have an ongoing relationship. We already have an investment process. We're already doing the things. The person who sits across from you from the meetings will be different. Look, they're also awesome because we hire great people and have a great culture.
Carl: And you know them. They've been in meetings. The team and everybody here. And I think it's just...because what I watched happen, which I just hope we can avoid is these weird, what was that crazy, he was an agent, it was a movie, it was a book. Show me the money. What was that?
Michael: Jerry Maguire?
Carl: Yeah, and the phone call. I'm not going to say he was taking drugs. Right? Those weird phone calls that go really proactively when somebody leaves and we're like, "Hey, you're staying, right?" That's the sense of the call. I think it's much better to just go, "Hey, why don't we come in for a review meeting, business as usual. And by the way, John's left and if you have any questions, don't hesitate to call us on it," and agenda." To me, it's a cleaner, healthier, more confident way. The last thing we want to feel is needy and combatted and certainly slimy. We never want to do any of that stuff. To me, that's the interesting communication piece is, look, you can handle that if it ever happens. But guess what? It's probably not going to happen in the first place. So, hire the people you need to hire. Make the best guess you can. Use all the formulas and the books and get after it.
Michael: To me, just the biggest takeaway is the mindset shift. Even if your vision is clients for life, they're not clients for life for you, as the advisor.
They're not clients for life for whatever advisor you've hired. They're clients for life for the firm. And the firm can have people and it can have multiple people, and the people may change over time. How you show up as a firm, how you execute, what your culture is, what your people do, the quality of the people that you hire, that's what builds clients for life with the firm. But, it doesn't have to be an advisor for life. Clients are clients for life with the firm, not clients for life with you or any particular advisor.
Now, if you want it to just be literally clients for life with you, that's cool. That means your practice is only ever going to be as big as the number of clients you can personally handle, and you're going down a different path. I'm assuming, fundamentally, if you're hiring an advisor, like the top of this discussion, if you're hiring an advisor, you have decided to grow beyond yourself. I suppose, make sure that's what you really want because that's a big crossroads in and of itself. But, assuming you have made the decision to grow the firm beyond yourself, almost by definition at that point, they're not your clients for life. They're the firm's clients for life. And as long as you build trust and keep trust with the firm, the reality is that trust is transferable to at least the next good advisor that you hire.
Carl: Totally. Amen.
Michael: Amen. Thank you, Carl.
Carl: Thanks, Michael. That's super fun.
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